The body overseeing tertiary institutions has "lost its way" and will cease to exist without major changes, Tertiary Education Commission chairman John Spencer says.

The commission, responsible for administering $2.7 billion of funding a year, is about to transform from an allocation model to one of investment, the education and science select committee heard today.

"It's become very bureaucratic and I don't think it's adding value where it should."

Labour's education spokesman, Chris Hipkins, questioned why the eight universities in New Zealand all offered the same programmes and what was being done to change that.

Spencer said the commission agreed the country was small and had limited resources and universities consequently needed to specialise.

"I think some of the university councils struggle to clearly articulate where they're going and what their place is," he said.

"Take Auckland University with a billion-dollar turnover, $12b in assets and 5000 employees but it would rank as one of the top 10 companies in this country," he said.

Universities were major businesses and needed to be run like businesses which meant taking a governance approach, Spencer said.

"If we're really going to run an investment model those institutions that aren't performing have to suffer."

The TEC has had a complete overhaul of its board since two years ago, but if the direction didn't change the tertiary sector would be better off under the guidance of the Ministry of Education, Spencer said.

Labour's associate spokeswoman for tertiary education, Megan Woods said the competitive funding allocation process meant some institutions had changed the way they passed students sitting courses to ensure they kept getting topped up each year

Spencer said that approach was the beginning of a slippery slope because the wrong drivers were there.

"They realise they can't have it all their way and they know it's limited funding and we can't sit and write cheques out."

The tertiary institutions should establish what roles they wanted to play and set outcomes they wanted to achieve, he said.